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Energy re/insurance market near a pricing cliff edge: JLT

4th April 2017 - Author: Steve Evans

The energy insurance and reinsurance market continues to see prices decline, despite demand having dropped significantly as primary clients cut their costs and many underwriters operating at combined rations above 100%, according to broker JLT Group’s Lloyd & Partners unit.

Energy insurance and reinsurance imageThe offshore and onshore energy insurance market has been beset with difficulties, as energy company clients pulled-back on spend, new project numbers dwindled, commissioning of floating production and storage units slowed and energy usage continues to shift due to innovation and modernisation.

But still energy insurance costs have been coming down, with one of the main causes of that being the excess capacity in both insurance and reinsurance markets.

Of the specialty lines, energy insurance and reinsurance is a target of the majority of major global players, as well as the capital market players on the reinsurance and retrocession side, making the pressure due to weight of available capacity in the line of business one of the most extreme felt.

Despite there being a number of major losses in the energy sector in recent years, the appetite to continue to underwrite these risks at increasingly low pricing continues and as a result prices have continued to decline.

Add to the pressure the fact that many reinsurance firms are expanding into commercial and specialty facultative insurance lines and it’s easy to envisage the capacity chasing energy insurance opportunities continuing to increase.

Underwriting continues to be near break-even for some, with a number of energy underwriting teams operating at combined ratios of over 100%, according to Lloyd & Partners, despite the fact they haven’t witnessed a major Gulf of Mexico hurricane in some years.

“The increasing fragility of the market suggests we are closer to the cliff edge,” Lloyd & Partners explained in its latest report, leading them to suggest “locking in current pricing levels wherever possible.”

Will the cliff edge that approaches result in an increase in pricing for the energy re/insurance sector?

It’s hard to say. With no major Gulf hurricanes, excess capital and a shrinking premium pool, it seems likely that competition for energy insurance and reinsurance renewals could increase, rather than fall away.

“Worryingly for capital providers, the bedrock upon which the offshore book is built has been severely depleted,” Lloyd & Partners explain, saying that a “drastic reduction” in premium spend from national oil companies is exacerbating the issues.

“The power of oil and gas captives” is also adding to the general decline in rates, and resulting in commercial market shares of energy insurance arrangements shrinking even further.

JLT’s Lloyd & Partners unit believes that change could be on the horizon though, with underwriting looking increasingly less tenable at the current profit margins and under the current market dynamics.

They believe this change could come later this year.

“The low margins and increasing volatility the sector is suffering means its attractiveness is tarnished; changes are likely to be upon us by year end,” they explain.

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